Unknown Advisor

The Unknown Advisor is an investment advisory representative for a registered investment advisor in Florida. This blog is not about selling. It's about general investment information, about what has worked, over time in investing. Asset allocation, for example, has worked. Because certain things have worked, they are likely to work in the future. Feel free to email me questions.

Wednesday, January 31, 2007

Are Federal Employees Investing too Conservatively?

Yes, Uncle Sam's employees have a pretty good deal, overall. But the study of the TSP referenced in the WP article below gives the numbers: about 29 percent are investing with a "no risk/low risk" approach; about 59 percent "moderate or balanced", and about 11 percent investing with more risk. The conventional rap on government workers is that they work for the government for career stability. I think that is probably partly correct, but if more than 11 percent of federal workers are relatively young, when you need, need, need to be getting your investing off to a good start, then they are potentially unnecessarily courting the risk of underfunded retirement. And the rest still need to be investing in a way with an age-appropriate allocation to equities, to make that money grow. The TSP is a fine plan, and there are some pretty good things to work with in it.

Tuesday, January 30, 2007

A useful discussion, and frankly, I don't think enough is being written on this. "Honor your father and mother" has never been repealed, and it includes supporting them if their resources are not enough. And yes, "support" does mean much more than money. God bless the ones who are on the front lines of this issue.

Looking to try to do some good in the world with how you invest your money? Who wouldn't like to do that? The idea's interesting, and the article discusses the appearance of "socially responsible" choices in 401(k) plans. The link is below.

The first thing I would urge you to notice is that the 401(k) vendor is using the socially-responsible approach as a marketing strategy. This does not make it a bad thing, but it is largely about the use of socially-responsible investing as a successful marketing niche, because of its' appeal to investors who want to do a good thing. IMHO a 401(k) vendor who wants to do a good thing should start with setting fees and fund expenses at the low end of the competitive range. I can find not one word about fees in the article.

There are a few counterpoints in the article, and I will highlight one I think is extremely important: "Some people criticize socially responsible mutual funds for having lackluster performance. However, that isn't always the case." That isn't always the case? Boy, that's a powerful defense. The problem is that often it has been the case. The company most typically excluded by socially responsible mutual funds is Altria, fka Philip Morris. Nobody gets excited about owning the stock of purveyors of cigarettes. I don't -- my father lost most of a lung to cancer. Like many of his generation, he smoked. You should not smoke, but it still is a free country. But I'll admit this, Altria is probably one of the most consistently profitable and best performing long-term stocks you could have owned over the last fifty years, and the company does not stiff its stockholders. Jeremy Siegel called it the best single-company investment in his book The Future for Investors. It returns cash money to investors in the form of dividends. It is an honestly-run company too, as far as I can tell. I'm not touting it. What I am saying is that you could very likely find that many "socially-responsible" or environmentally-oriented companies don't gain in share value over time like Altria, don't pay out dividends like Altria, or have badly inferior records for honestly running their businesses, and keeping conservative accounting standards.

It is no simple call. Indexed products, arguably the best approach available, include the problem companies. Cull out your objectionable companies as you will, and you will very likely pay a price in lower portfolio returns, and still find your "socially-responsible" holdings in the newspaper over and over again after some scandal blows up. There are too few companies out there that will not ever disappoint you in some significant way.

In an imperfect world, I would urge you to try to invest as well as you can, for the best returns -- you'll need them -- and support your favored causes, like smoking cessation and addiction recovery, with your dividends and long-term gains. If you invest unwisely, you may not have the financial means to help your causes.

Otherwise, where do you stop? Throw out the gun makers, the war-mongering defense contractors, the casino operators, the booze makers, the ... carnivore meat-packers, the oil companies, the coal-mining companies, the polluters, the oppressors of poor third-world peoples, the fast-food operators who make America obese, the credit card vendors, the Predatory Retailer who is non-unionized and who stamps out locally-owned stores, the ... list goes on, depending on your own views of what is socially irresponsible. Is this any way to make a sane portfolio?

Monday, January 29, 2007

Pretty good review. If you captured some short-term losses last year, but want back in, be a little careful how you do so, as the article discusses. Incidentally, if you are in an advisory relationship, a way you might evaluate the service your advisor is giving you, if you have some money in a taxable account, is does he harvest material short-term losses for you each year when they exist? If not, ask why, and get a good explanation.

Also, does he only think about this subject near the end of the year? You can take short-term losses whenever they come along, unless you are invested in such a way as to preclude your doing so. For example, some otherwise excellent no-load mutual funds have short-term redemption fees. And of course if you've been placed in load funds, where there are sales charges, etc., the whole idea becomes problematical.

ETFs are very usable for tax loss harvesting, and usually there are pretty good choices for replacement holdings to avoid the possibility of a wash sale rule problem

Saturday, January 27, 2007

Hotly debatable in fact. I will say this: the financial planning profession's typical idea of how much you need to have saved when you retire just doesn't match the more modest amounts many middle-class people now in retirement actually have.

Friday, January 26, 2007

WSJ "How Borrowed Shares Swing Company Votes" by Kara Scannell

"SEC and Others Fear Hedge-Fund Strategy May Subvert Elections" (intro only is free - full article is subscription only)

If you have access to the whole story, it should concern you. "In some cases, the strategy has allowed speculators to gamble that a company's stock will drop, and then vote for decisions that will ensure that it does -- without their ever having to own any stock themselves." Yes, the regulators are interested. The issue seems most likely to succeed with a small-cap stock, but who knows? Buy a copy or go to your library.

What does it take to get someone to dust off a serious word: Manipulation.

One possible remedy in the article: outlaw voting by borrowers of shares. Surely the hedge funds and some lenders will argue this is not feasible; I will say of course it is.

To short a company's stock, then borrow more shares from institutional shareholders or through brokerages, and then vote in ways to negatively affect share prices, then rake in the money -- well, to the extent that this actually is a fair description of the practice -- that is just corrupt. I don't care if it is arguably legal (for now,) it is corrupt.

For an institutional shareholder, a mutual fund or pension fund to allow its shares to be borrowed by entities presumably attempting to negatively impact the value of those shares is a curious kind of stewardship. The "rental income" from the shares does not seem likely to be equal to the possible loss in value, or the hedge fund or other party doing the "empty voting" as the practice is called, would not be doing it! The article mentions that one mutual fund house, Lord Abbett, has scaled back its stock lending, and that Calpers and some other large pension funds have put some limitations in place also. Good!

The article suggests that brokerages and banks make about $8 billion annually from lending shares, and the institutions make an unknown amount. here's the link to the bit of the story on WSJ Online:

Thursday, January 25, 2007

Awhile back I wrote a post about several serialized portions of Henry Blodget's new book. Susan Antilla of Bloomberg does a good job of reminding everyone just what Mr. Blodget did that got him fined and "moved to the sidelines", as I put it in that post. I could have said some more on that. His book, as she notes, has good general advice in it, and I would say that it could help small investors do better than they can on their own. What he did back in his heyday was very wrong, and it did hurt people. We should be aware that there are very probably others still working in the industry, with similar propensities.

As Ms. Antilla says, "Wall Street can be a hazardous place for the trusting individual investor." Apt, important words. Keep her caution in mind the next time someone pitches their very special heavily-commissioned investment product to you.

Yes, yes. Mr. Prestbo gets it. He's talking controlling your overall portfolio volatility by blending asset classes, which implies patience. For every article on how to speculate on somebody's hot stocks of the month, or week, or day, or morning, there should be one like this on real investing.

Wednesday, January 24, 2007

Bloomberg: "Davos Economists Say Derivatives Demand Creates Risk"

A brief quote or two...

"Surging demand for derivatives is making financial markets more vulnerable to any slowdown in the global economy, said economists and executives at the World Economic Forum.

`You can easily get liquidity from the market every second for anything,' said Bank of China Vice President Zhu Min at a panel discussion on the global economy in Davos, Switzerland. `We really don't know what the risks are.'

...or three.

"...a glut of cheap money allowed investors to bet more borrowed funds in financial markets. That's prompted policy makers including European Central Bank President Jean-Claude Trichet to say investors may not be accurately assessing risk.

Montek Singh Ahluwalia, deputy chief of India's planning commission, said derivatives demand is a problem because `people don't have much experience of this' with the instruments in declining markets."

Not to create apprehension, but if these guys see this as a concern, how should ordinary investors see it? I wonder what kinds of nightmares these guys have?

Your financial buttresses to a derivatives-related "glitch" in the financial markets are probably better than you might think. They're the usual things you will see recommended around here. Learn about and use good asset allocation, reflecting risk/volatility levels you really can handle, including something of a value investing-oriented approach. Coffee cans buried in the back yard are not the way to go.

When you invest in a non-straightforward way, to primarily "get the best of the tax code", you may get an outcome you did not seek. Watch yourself. There are plenty of tax-efficient ways to invest. Good advisors can earn their keep for you, or you can educate yourself to become a good do-it-youselfer.

Washington Post --"Puffing Up Performance? Accounting of Sales by Dot-Coms, Other Companies Increasingly Troublesome to Regulators"

Here in the USA we like to tell ourselves that our accounting numbers and corporate governance are the best. Well, the Europeans think we could do better, and ... I certainly hope that we don't see another round of stories about bad accounting at dot.coms.

Tuesday, January 23, 2007

FT -- "Long-only is the new black in quest for ‘alpha’" (James Altucher's column)

The best for last. Hedge funds trending to 'long-only' strategies? Say again? Again with a few quotes....

"In the past three weeks I had two funds of hedge funds and one $10bn family office based in Geneva call me and essentially say the exact same thing: We’re starting to look at long-only hedge funds. 'We’re tired of paying management fees to people who are guaranteed to lose money over time,'" Huh?

And, one to chew on for a bit,

“Long-only” is the new black. What’s the basic idea and is it a bearish sign on the markets if suddenly everyone cares about only going long? First off, it’s not bearish at all. It’s smart. It’s very difficult to create alpha from shorting. In other words, when someone invests in a skilled shortseller they are hoping for two things: 1) when the markets are down the shortseller is up, and 2) when the markets are up, the shortseller is not down as much as the markets are up. This last condition is the “alpha”. But here’s the problem: 99 per cent of shortsellers are incapable of doing it.

FT - "Goldilocks still defies the bears"

The three best things I've seen today (so far) all came from the Financial Times. It's good, but how often will you see that? A few choice quotes from the linked piece....

"Even Bill Miller, who last year suffered the end of his record 15-year streak of beating the S 500 index, is strongly bullish for 2007...'We expect 7 to 8 per cent earnings growth and, when you take into account other factors, such as dividends, and include our non-consensus view that the US dollar will rise not fall, that means that if you are a European investor, you could earn 30 per cent from the US stock market next year.'”

"John Hodge is the president and chief investment officer of Permal, the world’s biggest fund of funds, with $27bn. He says that the consensus among the 200 hedge fund managers that Permal invests with is that there will be a “soft landing” (the Goldi­locks outcome) for the US economy this year."

FT - "ETFs: winning concept's meteoric rise"

A nice review of current status and how ETFs are changing, though I'd be wary of speculative approaches like those listed at the end of the article. You just don't need to speculate, and leveraged ploys are not winners for most of those who use them.

Monday, January 22, 2007

SecurityFocus blog: "Stock spammers gain while followers lose"

Do you sometimes see strange unsolicited emails touting some smallcap or microcap stock you never heard of? There is a lot of this happening now, perhaps a third of all spam according to this post. Whatever you do, do not buy this way. Someone already has and is just waiting to sell into the tide of purchases from those of the recipients who actually buy the recommended stock. It's a bad move.

From Larry Kudlow: "Don't Mess with Success"

"...In 1993, before the 13 years of no tax hikes began, the federal deficit was 3.9% of GDP. Today, after 13 years of tax cuts, it's about 2.5%.

And back in 1993 the cumulative federal debt was 49% of GDP. Now it's only 39%."

Larry says it pretty well indeed. When taxes on investment gains are low, investors have a better reward for taking the risks of investing. When taxes on gains are higher, investors have less of a reward from investing. Everyone say it together: "Taxation alters taxpayers' behavior."

In investing, higher tax burdens deter the acceptance of risk, as the risk is less-well compensated. Acceptance of less risk means lower investor returns. That is not at all what the country needs now, as the baby boomers are heading into their retirement years significantly underfunded as a group.

Sunday, January 21, 2007

I just want you to look at the story, and stop at the word "cap", and ponder for a moment how you would feel if you had something like this in 2003, and your well-invested friends had made 35 percent on their equity holdings, and your statement, perhaps in a footnote, explained again for you how your 'double-the-upside' investment was "capped at a maximum index gain of 6.75% over the 16-month term. Double the gain to reflect the leverage and the maximum gain is 13.5% over 16 months." (Mr. Jaffe's paraphrase.)

There is no cap on the downside, of course.

My very general advice on things like this: Life, especially life in your dealings with the world of financial services, is not a visit to a candy store. All that glitters is not gold. Things with complex characteristics like this are usually made to sell. For salesmen, to sell to you. For a price. Caveat emptor.

Managing Your 401(k) -- Just a Gentle Nudge

So, if you are having difficulty funding the kind of contributions you know you should be making to your 401(k), if it is a question of your lifestyle hindering your future, here are a few helpful ideas.

Saturday, January 20, 2007

Importance of Wise Choices of Mutual Funds

Can you look at the chart above and get it? Can you see the cost to you of a lifetime of underperforming investments? What you see in the chart is two outcomes, one of which is much, much better.

This is not intended to kick Fidelity Contrafund around. Contrafund is certainly better than many other funds that are out there. But you have a strong interest in getting it right. Getting it right with excellence.

How not to get it right: If you watch TV to learn how to invest, all you will hear is some character yelling and jumping up and down making simian sounds telling you how to trade too much in going after short-term gains. And I am not referring to the commercials! Or you may see some less-diverting version of the same thing. A few exceptional programs exist. If you get lucky and make some short-term gains, then Speaker of the House Rep. Nancy Pelosi will want to tax them away from you. (Sorry, Madam Speaker!) That isn't investing, it is speculating on the stock price. Investing is a bigger, better thing, that even regular people can do well. So, what is real investing? Rummage around in the old posts here. Subscribe to the RSS feed. Come back for more. Bring a friend. We'll get there.

Parting thought: The really stunning thing isn't on the chart. The evidence is in and the research has been done. There is something even more important than what fund you choose. It is which and how many asset classes your portfolio holdings include and how you allocate your money among them. Then, you flesh out the portfolio with excellent holdings. That's getting into investing. But some things come even before those. [mostly involving the customization for each client's needs, and they can't all be dealt with in one blog post.]

Post edited 1/21/07 to correct Ms. Pelosi's title. My mistake. And to add the last few bracketed words.

Friday, January 19, 2007

Bloomberg's Article on Fidelity Contrafund & Some Thoughts

Updated to fix the link below!

Fidelity's Contrafund (FCNTX, closed to new investors) is a behemoth. At sixty-nine billion dollars, that's with a "b", under management, it is Fidelity's biggest fund, larger now than Magellan, and it trailed the S&P 500 by a noteworthy 4 percentage points last year. It's also significantly behind the S%P over the last ten years, as you can see above. That is a long enough time to mean something.

It has to be extremely problematic to manage such a fund without it just becoming in essence the proverbial "closet index fund", taking active management expenses for index fund performance. To their credit, the fund's managers evidently work hard to set themselves apart, and the fund is well regarded. In general, with such a fund, the manager must, to differentiate it from the index, make not just company picks, but industry or sector picks, or in some funds, perhaps even country picks. To significantly impact the fund's returns, you must put a monstrous amount of money into or out of a sector or industry, let alone a single company's stock. As I said above, Contrafund has worked well in the past, and it is successfully marketed as a choice in many 401(k) plans and variable products.

The key, the point of this post, really the ultimate question about such a huge fund (and it is a fair question, too) is whether the open-end actively-managed mutual fund model itself breaks down, performance-wise, with such a brontosaurus of a mutual fund. The whole idea of active management, to beat the market, when you grow so very large, can reasonably be questioned, even if someone is not a "hard core indexer". It isn't enough to point even at a record of beating a fund's index bogey, but the investor is owed something of a rational basis for the idea of how active management can work on such a scale over a significant time period. Perhaps it exists, I just haven't encountered it yet. Appealing to the supposed very large and highly-advanced brains of the fund managers (I'm quite willing to concede them that,) isn't enough either, when it is mostly having a hard time keeping up with the bogey.

Fair warning, the writer's opinions are reflected in what follows; I believe them to be reasonable.

The twin focii of her article and arguably the study are higher expenses and inferior returns in association with poor asset allocation. All I will say is that a sales-oriented, higher-fee advisor is likely not worth the money, any more than the kind of broker the study analyzes is worth his load fees, 12b-1 fees, wrap fees, or whatever other pricey ideas he is pushing. She and the study could do a better job of using precise, defined language however.

I will try to. But please bear in mind that the discussion is still on a rather simplified and general basis, and that long chapters of material have been written on these subjects.

Brokers, registered reps, "account executives", "financial consultants/planners/advisors, etc.", holders of series 7 securities licenses, do not have to learn anything very special at all about asset allocation to pass the test. They learn the basics, the very, very basics about asset allocation. Their advice is considered to be "incidental" in nature, by the regulators, compared to what you legally are paying them for, the trading, the buying and selling to invest your money. The primary standard they have to meet to be on the right side of the regulatory apparatus is one of "suitability", which has little really to do specifically with whether their stock picks as a whole constitute a portfolio which will achieve your investment objectives. They just have to be "suitable", which is a horse of a different color. What is "suitable"? It is any of the multitudinous things not already ruled "unsuitable" by the NASD. Got it? No? It is often stated as "know your client, know your product". If the client is an elderly widow living off her investments, who has no way to make up large losses and the product gleaming in the broker's eye is some illiquid, non-marketable security with a lovely thirty or forty percent off the top commission/sales charge, it could be unsuitable. (Don't laugh, such things exist, and they're nothing to laugh about.) There are supervisory people who oversee suitability and other compliance issues. Lest I be too hard on the brokers, many of them are good people, and really want to do well for their clients, and struggle to keep their clients' interests and their own, and their employers', in balance. My concern is that I just think their industry's business model is problematical, and rewards the wrong behavior and the wrong people too much of the time. Then those wrong people show up in the newspaper.

"Investment Advisors", as in holders of series 65 or 66 securities licenses, must meet what is known as a "fiduciary" standard. That has been defined various ways but is concerned with placing the client's interests first, even when it hurts. It is a higher standard of responsibility, and if you deal with an advisor, find one who is earnestly serious about high fiducuary standards. If he is so, he is trying hard to do his work the right way. It ain't sexy, but a good advisor who is a good fiduciary will quit the business before he will take advantage of a client. How serious a particular advisor is about this varies. There have been advisors out there with language in their advisory agreements which substantially weakens their fiduciary responsibilities. CFPs have high disclosure standards, and advisors who are members of NAPFA have very high ethical codes to work by. Compliance shortcomings of advisors show up in the newspaper too.

My only rebuttal to the article, if it really is such , is that a low-fee advisor with high fiduciary standards and a better-than-average grasp of asset allocation and the things which have really been shown to work in investing offers pretty good value for his or her fee. The clincher is that that advisor will try hard to stop you from making frankly horrible mistakes with your money, like panicking and selling around the bottom, when the chips are really down.

A final thought: If an advisor promises to get you out of the market before it gets bad, I would steer clear. Financial advisors can't foretell the future. If they'll promise the impossible to get your business, that does not 'augur well'!

Keeping the gold in the golden years - MarketWatch

Some take-aways: "'People need cash flow; they need money and they need it to grow by more than the inflation rate,' said Harold Evensky, a financial adviser in Coral Gables, Fla. 'You need to think holistically and throw out the concept of an income portfolio.'" I tend to agree that going too conservative with your investing will subject you to the greatest long-term risk, that of outliving your money as a consequence of low portfolio returns, inflation, and a good long life. You don't (speaking rather generally, here,) invest like a young person, but neither should you go into the investing equivalent of the fetal position either. At 66, for example, you may still have a twenty or twenty-five (or Lord willing, even longer) investment horizon -- that makes you a long-term investor, and frees you up (some) to go for some gains.

Another: "A generalized approach to spending starts with a '4% solution' -- taking 4% of a portfolio's total value in the first year of retirement and increasing this amount annually to match inflation. ... but 4% is a baseline. A study by financial adviser Jonathan Guyton, published in the March 2006 Journal of Financial Planning, says retirees can accelerate spending provided they adjust to market fluctuations. " Guyton's study is very intriguing, and intensely debatable. I've read it. I'm certain that it won't be the last word. The article does a reasonably good job of synopsizing Guyton's conclusions, but you really should not not modify your own draw-down plans without discussing the question with your financial advisor.

Read the entire article carefully. There's a lot more good stuff in there.

A Thoughtful Columnist's Take on Retirement Funding and a Question

I will get one thing off my chest right now. If you go into an office and do not see anyone with gray hair, it may just say something about that place's attitude toward older employees. They may not want any. But if their marketing efforts include reaching seniors as customers, then perhaps there is a big disconnect. If a business is not senior-friendly as an employer, then do they deserve to make any sales to seniors? If they wouldn't want you as an employee, well ...? Well?

Two Great Posts on Financial Page

Barry Barnitz' Financial Page blog is just a marvelous resource. The quality of the content is consistently very high. I'll link to two posts here and add just a few comments regarding the pdfs he links to.

Morningstar's numbers confirm what so many have observed as to how the markets are doing now. Large-cap value and small-cap value US stocks did very nicely in 2006 and continue to do quite well, though the small-caps may be cooling off some. Large-cap growth stocks are now performing about equally well as the large-cap value, and are valued somewhat cheaply, at least relative to some of their historic peaks of valuation. All of this implies that a portfolio with some value "tilt" is still working well, though the potential for improved large-cap growth relative to value in 2007 may be there. The beauty of it all is that, just as you would expect, value investing is looking just like one would expect, sort of the "man for all seasons," and growth, when it has its day, will likely give you plenty of time to work it in in a measured way, if you are into tactical or mean-regression anticipation approaches. Small-caps, likewise, if they go cold for a time, have pulled very well for a multi-year period, and a period of time when they trail their large-cap brethren can be handled well either in a strategic or more tactical way, depending on one's pre-meditated portfolio approach. Sticking to one's approach is the hard part!

The second post, What Moves the National Retirement Risk Index? gets into the real issue for us all. Will we be adequately funded for retirement? As a young man, I confess, I just couldn't get serious about thinking about retirement. I couldn't. Each day was full of things to do, and retirement might as well have been in the next century. It will be!

If you are young and reading this, congratulations. You can take small, easy steps now which can make a great positive difference in you future and the future of those you love. Put what you can into your 401(k) each month. Sweat over investing it well. Don't try to time the market by leaving your money in the money market fund or bonds choices until you see a bull market. You won't see it until it's well underway. If you got burned in the bear market, it's been over for four years now. You could have made some money, perhaps one hundred percent or more, just with some well-chosen, diversified equity holdings. If you've been very risk averse, expecting a terrorist dirty bomb attack or some other disaster, the news is that it did not happen. Live in hope, not fear. These are the years for you to grow your money. Sure, bear markets happen, but you, as a long term investor, do not have to sell. You can take the long view, stay invested, and pull ahead. Market timers, as a group, fall ever further behind. It is a fact of financial life. Successful market timing is the financial equivalent of searching for El Dorado. It is not there. But you don't need El Dorado. All you need are time and some good markets. Get some knowledge. Read up. Learn about the one thing that really, truly works over time. It is called asset allocation. It is like the proverbial wisdom of the book of Proverbs being cried out in the streets, and being mostly ignored because it is not "sexy", it is not fast, it does not lend itself to exploitation by billion dollar brokerages ravenously hungry for revenues, in the way that failed ideas like technical analysis and market timing and even (gasp) "active management" do.

If you are older and thinking that you may be underfunded, well you have plenty of good company. Understanding the problem is the first part of the solution. If you are underfunded, guard your good health, and get a good night's rest, and go to work, one step at a time, to move toward fixing things up. There is much that can still be done.

Monday, January 15, 2007

from WSJ Weekend Edition -- "Smart Retirement Shopping" - Updated

The lead sentence: "Winston Wong first learned about reverse mortgages over a plate of chicken."

It's worth a trip to the library if you aren't a print or WSJ Online subscriber. It's on page "B1", and it is an eye-opener. The paid-subscription link is here.

The story is called "Smart Retirement Shopping", and it would be a genuine public service if they made this article freely available -- it's that good. It's got an overview of today's commonly-seen abusive high-pressure sales pitches and inappropriate products being hustled about by unscrupulous salespeople with seniors' money in mind. It has the products, discussion of the hard sell, the pros and the cons, and how to fix it, if possible. Not everything is bad with these products; some of them have a place, or less-expensive versions or alternatives that exist. And some of the people selling these things actually do have things in mind in addition to getting their next commission check.

Discussed are:

(1) Life settlements, which provide a way for a salesman to get another fat commission buying back your life insurance policy (for which he or another salesman already got a big, fat commission when you bought the policy -- do you see a theme here?) so you can get some of your cash back when you need it.

(2) Reverse mortgages, which have their uses but are usually pretty expensive.

(3) Variable and indexed annuities. Be careful. Be really careful with these. I have written before on these, and the problems with them are big. A very few "no-load" variable annuities exist, and some even have sub-accounts with excellent index and asset-class replication funds to work with. Here is a suggestion. Before you sign on the dotted line for one of these, do yourself a favor -- first, demand a signed, full written disclosure in plain English of how much the salesman will receive as his commission, in dollars, both immediately, and in "trails", or afterward, for selling this thing to you. Then, again before signing, do yourself another favor. Do an internet search for "no load variable annuities" and work very carefully from there. you could save yourself a lot of money! I do not have one good word to say about equity-indexed annuities. They are the salesman's best friend. In my opinion, you have a number of better choices.

(4) Life insurance. You just have to read it.

(5) Living trusts. The focus of the article is the folks who are not [I accidentally left out the word "attorneys" here!] sell these things whether they are really needed or not, just to charge you $1,500 for a boilerplate template, or even worse, to find out what you have, so that they can sell you something else and make another commission.

I'm sorry, but there is no free link for this one. If you are in the market for the things discussed, arm youself with all the knowledge you can get. It's a tough financial services world out there.

The Rebirth of Henry Blodget

You really should read this. Mr. Blodget's name became a byword after the "tech wreck" and the 2000-2002 bear market, and he has been watching and learning a lot, it would seem, as he is confined to the sidelines now. Riveting reading, and it's simply remarkable to see him talking about real investing, not just stock picking. I kept expecting to see things with which I would seriously disagree, but it wasn't like that. I was rather impressed. These are excerpted and adapted from Mr. Blodget's new book, The Wall Street Self-Defense Manual, published this month by Atlas Books and Slate.

Sunday, January 14, 2007

Perhaps a Defining Moment

Once in a while, you see a nice surprise, or perhaps just some good news. It's good, isn't it?

Only a few of the economists and writers whose work I encounter daily seem to have much of a positive approach. Needless to say, as a long-oriented (I don't usually do the market-neutral thing), rather strategically-focused investor I look for investment gains over longer time frames, and use good asset allocation to mitigate market volatility to levels consistent with each client's tolerances. Sounds dull, but it works so well.

Why I Post on Things

In a brief look back at what I've posted on, I have noted a couple of things which someone who does not know me might think are just hobby horses. They aren't. They go to the heart of smaller investors having a fair chance to achieve their own financial goals through access to the good returns which the financial markets can provide for those who invest wisely and patiently. You see, getting those returns is my business.

I have written frequently about hedge funds. There is room in the world for them I guess. But they have huge clout and very little restraint, and serious potential for actions damaging to their own and other investors. Yes, the market will deal with a hedge fund which invests poorly, but I would really rather not have the world's financial markets go through convulsions with them in their death throes, if you don't mind. We get enough of those anyway.

I have written also frequently on the subject of shareholders' rightful interest in not having the corporate enterprise's earnings slashed by utterly fantastic manager pay, excessive managerial stock options, not to mention unscrupulous or illegal abuse of same. Corporate directors are before anything else the trusted stewards of the shareholders' property (the corporation, if you please) and should not forget that. Whether the stockholders are investing to fund their retirements, college for their children, or just to gainfully deploy the financial resources they have accumulated, they have skin in the game. A managerial "hireling" with big pockets and a short-term employment horizon should be seen as having a radically lesser stake in the corporation's earnings. Mutual funds have largely supplanted individual shareholders, for many valid reasons, but they should never feel that they have no responsibility to vote their shares wisely, and in ways jealously protective of their portfolio holdings' long-term investor returns.

The common theme: we all, as investors, need and require orderly financial markets, and good directorial stewardship in the Board Room.

I know one person who is rather cynical sometimes about things. He's pretty smart. I can almost hear him saying, "...you know, that really is the way it's always been, and it's the only way it ever will be, and you're too old to be sooooo naive." Well I would just say that there are two world views through which you can see how things are. I will take a "half-full glass" view, acknowledge the imperfections of people and organizations and try to do what I can. There is power in reason, and in communication. Improving things, even if just incrementally, is possible. That other view is no fun at all.

More on Ruckus Over Nardelli's Compensation and Home Depot's Independent Directors

I sort of felt obligated to come back to this when I saw the NYT article linked below, as I had touched on it before.

It seems there are some HD stockholders with voices. The company now says that a majority of independent directors will have to approve Mr. Nardelli's compensation. How independent they are has yet to be seen, and in all fairness, there may be some pretty hefty sums built in to Mr. Nardelli's deal with Home Depot.

Monday, January 08, 2007

Fascinating Bloomberg Article on Barclay's Global Investors

I'll offer a few comments below the link. The best take-away from the whole article, for my money: "The rush into hedge funds may end badly, says Zvi Bodie, a finance professor at Boston University who has studied pension issues for more than 25 years. If hedge fund trades go wrong, the use of short sales could leave pension funds in a hole, he says." Further, he also says, "There is very little evidence that anyone can consistently beat the market,'' Bodie says. ``The pensions don't want to suck it up, so they're grasping at anything that might provide an answer."

First thought on the article's extended discussion of how BGI's hedge fund operation has grown larger than its' iShares exchange traded funds business, is that indeed, pension funds have rushed to put a lot of money into hedge fund-type investments, and if, as the article notes, the hedge funds do not successfully execute their strategies and make the kind of returns they have indicated they can, there will be more pension funds in a world of underfunded hurt.

Also, given the size of the funds coming into these institutional investor-oriented hedge funds, they simply cannot all beat the market. As has been said about the largest actively-managed mutual funds, in a sense, they are the market. The market cannot beat the market.

And, finally, if (hopefully not when,) BGI's hedge fund has a serious problem, I just hope and pray that it does not screw up the financial markets for more traditionally-minded investors. Like the Unknown Advisor and so many others. Ah well, if it does, think "buying opportunity".

Friday, January 05, 2007

In one of my earlier posts, I wrote some of my thoughts on this. Not to flatter myself too much, I think it's critically important for an advisor to make it clear, and in a very truthful way, that his practice is built around trying to deliver excellent, extremely competent service, and not around his love of salesmanship and heavily-commissioned investment "stuff". Of course, no advisor will ever come right out and tell you that he lives to sell. My post was titled "Beware the 'Hot Stocks' Syndrome!" It is Here.

Thursday, January 04, 2007

Great Discussion of Protectionism vs. Trade Deficits - What they Really Mean to You and Me

It's over at Larry Kudlow's Money Politic$, by George Mason University's Economics Dept. Chairman Donald Boudreau. Why blog on this? It's something we need to know, to understand the world and national financial environment, at least a little. Politicians and media personalities demagogue this sort of thing all the time, playing on the feelings of people. Don't let them. Arm yourself with knowledge.

While generally in agreement, I will add my two reservations to the ideas expressed in the post. First, I'd rather see American enterprises growing, rather than growing American employment by foreign-owned businesses, with growing foreign ownership of American industry. Secondly, while I am admittedly no expert on income taxation of multinational entities, I'd like to have a higher level of confidence that these foreign industries were paying similar amounts of taxes to those American-owned businesses pay, and not using accounting tricks to tell Uncle Sam that the American subsidiaries were breaking even or losing money, while all the profits "actually" are earned back at the parent company in Japan or wherever.

Tuesday, January 02, 2007

"Central Banks Tiptoeing Away From the Dollar" -- NYT

Except for the article's first sentence, which is a bit over the top, this strikes me as a pretty reasonable attempt to explain the "soft landing for the dollar" scenario, in which foreign central banks as gently as possible replace some of their dollars and dollar-denominated holdings with Euros or baskets of foreign currencies. They have no interest in doing anything which will reduce the value of their remaining dollar holdings or in damaging their ability to sell to the USA. They are not fools.

A likely slow, persistent downward long-term trend for the dollar implies rewards or at least help from a reasonably-weighted foreign component to your long-term (remember, we're long-term-focused here,) investing approach.

It is also helpful to remember that the flip side of a problem is sometimes an opportunity!

Good and Interesting NYT Article on Wills

Some good take-aways from the article: If you set up a revocable living trust, fund the darn thing! Fund it! Fund it! Probate is much more time-consuming and expensive! (And read the article's suggestions on leaving detailed lists of assets and your wishes.) Don't set your children up for expenses, more pain or even fights.

What the article does not say but might have. Talk to your mom or dad, perhaps print out the article, and show it to them. Get the lines of communication open, and keep them open. Talk to your siblings. It's better to get things understood before, when the pressures are not so heavy as they may be later.

"How to Protect Yourself From Shady Mortgage Pitches" -- MarketWatch

If you're in the market for a mortgage, here is a helpful article from MarketWatch. One of the takeaways: Never, ever get a mortgage with a prepayment penalty. You should not have to accept such a one-sided provision.

Why You Need to Invest in a Globally-Diversified Way

The world's financial markets do not all go up and down together, and not to the same degree either. Yes, correlations have been higher in recent years, but it is still a plus to have significant foreign equity holdings and bonds holdings also. And frankly, the U.S. dollar is carrying some pretty heavy long-term burdens. A headline like the one linked to below, like most any daily news item, is only of small importance really to a long-term, strategically-focused investor, but I must admit it's nice to see anyway!

"UBS' Leases to Hedge Funds Are Questioned" -- NY Times

The January Effect

The article linked below is a good overall look at the "January effect", one way of looking at the small-cap effect (broad market-beating nice returns in other words,) but with a substantially flawed conclusion -- that it is real, but that you cannot exploit it. You can. Several good vehicles exist, in exchange-traded funds and in open-end mutual funds, the best couple of which aim to replicate the returns of the entire U.S. micro-cap stocks "universe". My critique of the author's conclusion (and the research he is working from) is that he is thinking in terms of single-stock ownership, using some sort of short-term trading in conjunction with some sort of active management to try to capture the "effect". The solution, I would argue, is in a carefully-weighted inclusion of these stocks as a group using a suitable low-cost vehicle, and as part of an overall long-term portfolio strategy. In all honesty this is certainly not an approach unique to my advisory practice. It's not as exciting as some approaches, but some kinds of investment 'excitement" you really can do just fine, better really, without.

Who Do you Admire? Who Do You Listen To? Second In the Series -- Professor Jeremy Siegel

Professor Siegel's column deserves regular reading. In passing, I always appreciate the calmness and positive approach that comes through in his writing, and his books have a place on my bookshelf. Here's his thinking on how 2007 may work out: